Is the Video Working! You bet your ASS it is!

[jdepape]

chuckChuck:

For some reason you have the US mill in Minneapolis and the offshore buyer (somewhere else) paying the same amount - $300. Why? There is no market reason that would happen – other than coincidence.

Another problem - in your example, the farmer is being presented with two prices - $270 if he sells to the domestic market and $240 if he sells to the offshore market. How can that happen?

Before I can answer your questions, I need to be clear on what you’re trying to say.

On the other topics – patience, we’ll get there.

[chuckChuck]

John,
It was simplified example for ease of an explanation.

Actual prices will vary for each market depending on location and costs to deliver plus competitors bids of similar quality.

Another example: If lentils in Spain are worth 50 cents per pound. Lentil producers in Spain will reap a higher net price than producers in Canada who have a much higher freight bill to land their lentils in Spain if all other factors are equal.

US traders can pass on the freight savings of a larger US domestic market for wheat and Durum to US producers because a larger share of their market basket is domestic. Of course they can be selling to both domestic and off shore markets.

I am not suggesting that traders offer a separate domestic price or offshore price. Their returns from each market will be factored into their offers.

Does our basket of markets return less than the US basket of markets because of their higher domestic usage gives them a freight advantage in their own market if all other things are equal?

This is an important point because you have to account for the advantage in a direct price comparison.

If we could sell all our durum and wheat into the US it would be a non issue. But the reality is we are selling into a different basket of markets with a different percentage of domestic usage in our respective countries.

[bucket]

chuckchuck

You said

" Another example: If lentils in Spain are worth 50 cents per pound. Lentil producers in Spain will reap a higher net price than producers in Canada who have a much higher freight bill to land their lentils in Spain if all other factors are equal. "

How come that doesn't happen with cwb milling grain to the millers in Canada. Farmers get exactly the same price if they ship to the elevator or the mill?????

[jdepape]

chuckChuck:

Something needs to be very clear before we go on. Markets interact with each other. Some call it arbitrage.

If the US domestic market is paying $6.00/bu to farmers in North Dakota, we need to ask: what will cause farmers to sell to offshore markets at something less?

What happens when the domestic market is $6.00 and because of competition from other countries, the best the offshore market will pay is only $5.50? Who sells their wheat to the offshore market? If acting rationally, no one.

If the country in question (USA) needs to clear tonnage to offshore markets, one of a number of things needs to happen. First, the offshore buyer could agree to pay more to compete with the domestic buyer. But why would he if he could buy from another country cheaper?

Or, the domestic buyer could lower his bid to farmers, knowing that the only other opportunity for the farmer is to sell offshore at a lower price. Why would he continue to pay $0.50/bu more than his competitor?

Or, the farmer could only sell to the highest bidder – in this case, the domestic buyer – until he’s satisfied and then sell to the lower priced markets.

In reality, in a fully functioning market, all three happen at the same time. The offshore buyer acts rationally, buying from the best seller; the domestic buyer bids only as much as he needs to, to buy what he needs; the farmer acts rationally by selling only to the highest bidder.

The end result is, for equal quality and terms, the domestic and offshore markets merge – the farmer effectively sees but one price.

So it’s not a case of US traders passing on the freight savings – offshore markets compete with domestic markets for the same grain. If there is a glut of wheat in the world, the US price needs to drop in order to compete. In other words, domestic buyers will follow suit and lower their prices accordingly. If the global market is in tight supply, prices will move higher and domestic US buyers will need to raise their price to compete.

What makes you think that US domestic buyers will buy at higher prices than they need to?


You make an interesting comment: “I am not suggesting that traders offer a separate domestic price or offshore price. Their returns from each market will be factored into their offers.”

How so? Are you saying that the grain companies make more on one market than another?

To your question:
“Does our basket of markets return less than the US basket of markets because of their higher domestic usage gives them a freight advantage in their own market if all other things are equal?”

The simple answer is, no. Both markets need to clear to offshore markets, so both are a function of the interaction of those markets and the domestic markets.

[charliep]

Just to correct you chuckChuck, I will note that the US remains the largest
world wheat exporter with volumes closer in the range of 25 to 35 million
tonnes range. That compares to Canada at 15 to 18 million tonnes. If your
arguments about single desk/price differentiation were accurrate in the
real world (not the theoretical world of University), then Canada would
extract premiums and have higher returns. Your comments highlight the
fact that the CWB price differentiates which means they do obtain
premiums in some markets, other markets they sell at effectively US prices
and other markets, they effectively give wheat away in competition with
the lowest price markets or by applying higher grades than necessary on
sales contracts. The net costs of selling in highlight competitive lower
price wheat markets out weights the benefits of the so called premium.

On the premium, you have never indicated how much of the premium is
single desk and how much is Canada ability to supply high quality product
and superior service. If the driver is high quality product and superior
service, why couldn't an open market provide the same thing. Or heavan
forbid I would say this, make a CWB relevant in an non single desk/open
market.

To put the ball in your court, neither you or the CWB has shown CWB
benefit.

[chuckChuck]

John, You explained the theory of arbitrage but what actually happens in the real world day to day year to year?

Perhaps markets arbitrage efficiently some of the time but what about when the price discovery of futures markets isn't working properly? See link from March 2008 NY Times that discussed the problems in the wheat futures of 2007 2008.
http://www.nytimes.com/2008/03/28/business/28commodities.html?pagewanted=1&_r=1&ref=business& adxnnlx=1206705601-Zl5nd64ni9QdCjmIUaDPQg works

Charliep in the previous comment confirms what I have been talking about is that some markets pay more than others. I am not sure why arbitrage alows that to happen?

When the CWB posted a premium of 6.65 in 2008/2009 that includes all grades of wheat. It is unlikey that there is little if any premium in the highly competitive lower grade markets. But it is likely there is a lot more premium in the top quality grades. I am assuming that the premiums are passed on to farmers with higher prices for higher grades.

What happens in commodities without good public price setting mechanisms like futures market? I suspect that these markets are not as efficient.

Charlie, I know that the US is a very large exporter but they also consume alot more of their own production proportionately than Canada. If North America is a premium price market for high quality which I believe is true, then the higher proportion of domestic consumption in the US would be a price advantage to US traders and farmers.

Another way to put it is we are more dependent on a basket of export markets many of which do not have much premium if any because of competition from other suppliers.

The premiums you talk about it are undoubtedly due to service and quality. The question is would the open market pass on the premiums as effectively and fairly as the CWB?

I know that in markets without good public price discovery there are a wide range of farmer selling prices and this results in a range of margins for traders. Do traders always pass on the good margins? I don't think so.

In an open market without a guaranteed supply it would be unlikely that the CWB could provide the same level of service.

Whether we like it or not we have little choice but to sell most of our wheat production each year. Unfortunately we are competing with very low quality suppliers. There is a small limited premium market for Canadian high quality and service.

In an open market system the job of the trader is not to maximize returns to the farmer. Their job is maximize returns for the owner shareholder by maximizing margins between buying and selling prices.

[charliep]

So growers of 1CWRS 13.5 protein are paid the full value of the grain
that is sold to the Japanese/other premium markets? Likewise,
growers of mid quality grain or grain that is sold at discount into a
highly competitive market (say against Ukraine/Russian competition) is
signaled back to the farmers that grew the grain for those markets?

My understanding is that the benefit of premiums sold into some
markets is shared in the pooling of grain prices as is the pain of
discount markets. Perhaps in the most telling component is the
average price of Canadian wheat by your own admission is less than US
grain. Both the US and Canada sell competitively into similar markets.
The only difference is the US farmer is able to make decisions on
market signals with the ultimate threat to leave their grain in the bin.
The Canadian farmer is denied this opportunity and instead is expected
to respond to a command/control system. The Canadian farmer is able
to survive in an open market setting for most crops including the lentil
examples you use. Both lentils and durum prices went into the
crapper. They just took different roads to get there with different
supply chains along the way.

Don't agree with argument about the percentage domestic share
Canada versus the US. The most the 2 markets should vary is freight
costs. Works that way with oats. Canola (except the freight direction
is north). Even US corn. Arbitrage does work as long as there are no
artificial barriers. The bogey man is the US shutting down the border
but note that hasn't happened with other crops. You will have to do a
better job of demonstating your logic.

[charliep]

Perhaps the weirdest concept I ever heard while I was inside the
CWB and on the outside was the CWB could manipulate US prices
by choosing to sell or not sell into that market. My thoughts that
not selling the highest priced market on a return to pool basis (US
is likely more like what I would call a mid priced market by the
way) and then selling outside off shore markets for lower prices
was just plain stupid. But maybe I never had it explained right.

Perhaps an even weirder concept was denying a farmer the right to
sell their grain (not the CWB's wheat, not other farmers in western
Canada, not their neighbors grain) for best price available in the
market place on a given day at their farm gate. Could they leave
money on the table - absolutely. But what is the cost of the
current regulated command and control system?

[dak7]

Interesting thoughts Charlie.

Sounds like the CWB internal culture is flawed...they think they can manipulate the price of a commodity like wheat in this global market.

[bucket]

When I market my peas and a mistake is made, I look the guy in the mirror and give him a good talking to.

When the cwb makes a mistake marketing my grain there is no one to answer for the incompetence. You can't talk to the people responsible.

That's why I wish for the cwb to be out of my business or at least accept responsiblity for their mistakes.